Ethereum’s recent Shanghai upgrade has brought the network several changes, making it easier for financial investigators to detect criminal behavior within the space. The upgrade shifted Ethereum to a proof-of-stake blockchain using validators who stake their ETH for transaction confirmations. This transition opened up new “investment themes” such as decentralized finance (DeFi), stablecoins, wrapped versions of BTC, and non-fungible tokens (NFTs). Alongside these developments, Ethereum’s staking yields have come to represent the “risk-free rate” of the crypto ecosystem, enhancing the state of crypto forensics.
Traditional finance uses a risk-free rate to spot irrational fund movements, as money launderers aren’t concerned with profit maximization. Since Ethereum’s staking yield mirrors this risk-free rate, financial behavior that deviates significantly from the trends in the benchmark rate can be more easily identified. This can prove vital when detecting suspicious activities such as the wash trading of NFTs or laundering proceeds of terrorism through DeFi protocols.
On the other hand, decentralized exchanges have experienced an increasing volume of illicit financial flows due to improved compliance controls from centralized crypto service providers. This has created new challenges for forensic teams who need to adapt their methods to follow these complex transactions without prior knowledge of the assets’ criminal origins. Blockchain interoperability has also increased the need for systematic surveillance to detect potential criminal transfers.
However, this upgrade may still have some drawbacks. For instance, crypto’s extreme price volatility can render static risk thresholds ineffective, potentially allowing money laundering to go undetected. If Ethereum manages to set a stable benchmark rate, it could establish a baseline for rational fund flows and help identify illicit activities more efficiently.
Source: Cointelegraph
